Buried inside the high-definition Project Gotham Racing 3 game for the Xbox 360 console is a hidden “Easter egg” mini-game that has become the biggest hit of the next-generation platform.

Walk over to an old arcade machine in Project Gotham’s virtual garage, press a controller button and Geometry Wars – a psychedelic shoot-em-up reminiscent of the 1970s Space Invaders game – appears on the screen.

A free demo version of the game was made available on Xbox Live Arcade – a new online game section available through the 360 – and was downloaded 200,000 times in two months, with one in four players going on to pay $5 for the full version.

Geometry Wars is the number one game on Arcade and has generated the biggest buzz among gamers for the next-generation console – ironic considering added complexity for games and high-definition imagery was pushed as the main selling point of the 360.

But Geometry Wars offers hope for developers and publishers alarmed at escalating costs associated with taking games to the next level for the latest generation of consoles. It shows simple games can appeal and there are revenue streams available to offset production costs of the blockbuster titles. “One of the promises of new distribution methods is that it does allow smaller developers to deliver to customers directly on a more manageable scale,” says Neil Young, general manager of Electronic Arts’ Los Angeles studio.

“I would buy 100 Geometry Wars and [the developers were] just a two-person endeavour.”

But console delays and shortages, falling game sales, profit warnings and lay-offs at publishers hardly make 2006 sound the best of years for the video games industry. And yet, out of a chaotic period of transition, promising spores are emerging as the industry moves into a cycle of growth, spawning ideas and attracting fresh audiences.

The Game Developers’ Conference (GDC) in San Jose last month and the Electronic Entertainment Expo (E3) in Los Angeles in May reveal the bulk of industry trends and concerns for the year and are the stages for most of the big announcements.

At GDC, Sony gave more details of its PlayStation 3 console, which has been delayed from a spring launch until November – a year after that of Microsoft’s 360. It announced its long-awaited rival service to Xbox Live, which promises an even greater emphasis on digital distribution of games and other content than Microsoft’s.

It seems to be holding back on revealing the name until E3, where Nintendo will unveil its next generation console, the Revolution, also due this year.

At a “What’s Next” panel at GDC, games industry executives looked forward with some apprehension to a new age. “The business models for creating games for the next generation are pretty scary,” says Cyrus Lum of Midway Games.

“You’re looking at budgets from $15m to $25m. You probably won’t make the money back until maybe the third sequel, so you’re in for the long haul.

“We need to rethink how we’re financing games. Some of that is coming with product placement and in-game advertising but we have to be more efficient in production – it’s taking four times the amount of effort to create artwork for the next generation. Art is the 800lb gorilla of your project; it’s responsible for the majority of the cost.”

“Finding the money to make high quality games is very difficult in this climate,” says Dave Perry, founder of the Shiny Entertainment development studio. “People are starting to focus on niche areas of the market, such as the PSP [Sony handheld console] or are looking at what game players are interested in further down the chain.”

Handheld game sales grew by a massive 42 per cent in the US in 2005 – compared with a 12 per cent fall in console software sales – as players took to Sony’s PSP and Nintendo’s dual-screen DS portable gaming devices.

Paul Jackson, games analyst with Forrester Research, says there is no indication yet that rumours of Microsoft also introducing a handheld will turn into an announcement at E3.

“Microsoft has ambitions in the handheld consumer space whether it’s a mobile operating system or its ultra mobile PC,” he says. “Its Bungee and Rare studios are expert at developing for multiple platforms so it has the core underlying technology and the games studios.

“The question is whether it invests a whole lot more money in bringing a portable games platform to market.”

The industry sees great opportunities in simple “casual” games that are attracting a different demographic on platforms such as the PC and mobile phones.

The spread of broadband internet connections is contributing to the success of multiplayer online role-playing games such as World of Warcraft and City of Heroes.

“The good thing about the new sectors such as broadband and mobile is that the massive peaks and troughs once in place because of the new console generations are evening out,” says Adam Thomas of the Informa research company.

“Our forecasts for 2007 show the global games industry will be worth nearly $60bn, up from $35bn in 2005, so once all the consoles are up and running the market is going to hit an all-time high again.”

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